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Gold was steady in trade in Asia until 0322 GMT when
sharp selling saw gold fall 1.3% from $1,708/oz to
$1,684.75/oz in minutes. The fall may have been
technical in nature after last week’s 2% fall in US dollar terms. The
selling had the hallmarks of a large sell order or liquidation and Reuters
reports that “the approaching year-end and funding difficulties caused
by financial market turmoil have reduced liquidity in the gold market.”

Market reaction to the failed EU Summit was that gold,
the euro, European equities and ‘PIGS’ debt all came under
selling pressure this morning.

Gold is again testing support at the 144 day moving
average at $1,674/oz. Below that is the major support of $1,617.25/oz (see chart above).

Gold Spot $/oz (30 days)

With concerns about liquidity and solvency in the
European banking system, there is lending and possibly even selling of gold
by banks to raise much needed cash. This may be creating short term weakness
in gold bit is bullish for gold in the long term.

The FT reported last week that “gold
dealers” said that banks – “primarily based in France and
Italy – had been actively lending gold in the market in exchange for
dollars.”

The key question is who is lending and is their lending
simply liquidity driven - to raise dollars or euros?

John Dizard, who frequently
comments on gold in the Financial Times wrote on Saturday that,

“Gold market people say European commercial banks
are being driven to lend gold for dollars at negative interest rates just to
raise some extra cash for a few weeks.

There’s not a lot of transparency about where the
banks are getting the gold they are lending out, but it could be lent to them
by either their national central banks, or by gold exchange traded
funds.”

Cross Currency Table

If this is the case it will raise further concerns
about the possibility of double accounting of gold and concerns that much of
the gold investments in the market are in fact ‘paper gold’ and
not backed by physical as is believed by investors.

It will add to deepening concerns about the emerging
scandal of rehypothecation where some banks,
brokerages and dealers have been reusing the collateral pledged by its
clients as collateral for their own borrowing.

Owners of gold exchange traded funds (ETFs) would be
surprised and worried to discover that certain banks might be lending out
gold that they have bought and believe that they own.

The leading gold ETF, GLD has been criticized by many
analysts for its extremely complex structure and prospectus. Critics have
also pointed out the possible conflict of interest in its relationships with
HSBC and JPMorgan Chase which are believed to have large short positions in
gold and overall lack of transparency.

If as has been suggested, European banks are lending
gold into the market that has come from exchange traded funds then this would
validate the many concerns raised about the gold ETF market. Questions would
again be asked as to whether many of the ETFs are fully backed by the gold
that they claim to own in trust on behalf of clients.

Already some hedge funds managers and investors have
liquidated their ETF positions in favour of
allocated physical bullion and we would expect that trend to accelerate as
prudent investors rightly seek to avoid counter party and systemic risk.

OTHER NEWS

● The flow of gold from Hong Kong to mainland
China rose 51 pct in October to a record 85.7T,
bringing the total amount of gold shipped for the year to October to 286.6T.
(Reuters)

● Economist Dennis Gartman
said he’s “being taken out of the remainder” of his gold
position and investors should not own the metal priced in euros. Gartman had previously owned bullion priced in euros
“Those not already out of the gold side of this trade should be out
immediately,” he said today in his daily Gartman
Letter. (Bloomberg)

● Gold could hit $2,500 if Euro fails in what
would be a ‘horror story’ said Citigroup in a note. The Euro
failing is a “low probability” event. Citigroup emphasizes
it’s not forecasting $2,500/oz, though it
says this could occur were the Euro to collapse. (Bloomberg)

● Gold’s premium to platinum may widen in
months ahead, UBS Says. Gold’s premium to platinum “has room for
further widening over the next few months,” Edel
Tully, an analyst at UBS AG, wrote today in a report. The premium was at 12.4
percent today, Bloomberg data show. (Bloomberg)

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SILVER Silver is trading at $31.13/oz,
€23.51/oz and £19.93/oz

PLATINUM GROUP METALS
Platinum is trading at $1,483.75/oz, palladium at
$662.75/oz and rhodium at $1,450/oz.

Mark O'Byrne is executive and research director of www.GoldCore.com which he founded in 2003.
GoldCore have become one of the leading gold brokers in the world and have over 4,000 clients in over 40 countries and with over $200 million in assets under management and storage.We offer mass affluent, HNW, UHNW and institutional investors including family offices, gold, silver, platinum and palladium bullion in London, Zurich, Singapore, Hong Kong, Dubai and Perth.